The famed toy megastore that every parent dreads driving by with their children — Toys ‘R’ Us — has filed for bankruptcy so that a judge can grant them permission to borrow money for the purchasing of Lego and Barbie doll toys this holiday season.
According to Reuters, the Chapter 11 filing seeks to restructure “$5 billion of long-term debt” and is among “the largest ever by a specialty retailer and casts doubt over the future of the company’s 64,000 employees and nearly 1,600 stores.”
The megastore’s financial woes came to the fore earlier this month when Toys ‘R’ Us sought legal aid from a bankruptcy law firm in hopes to curtail what the company’s chief executive and chairman, David Brandon, referred to as “a dangerous game of dominoes.”
Vendors have not taken the news kindly and have refused to ship products to the company’s stores without a cash advance. With the holidays just around the corner, the collapse could not have come at more worse time for the company as they must now raise $1 billion to purchase the goods that keep them profitable.
“The timing could not be worse,” reports Reuters. “Toys ‘R’ Us is building inventory for the holiday season and fourth quarter, which accounts for 40 percent of net sales.”
“Toys ‘R’ Us received a commitment for over $3 billion in debtor-in-possession financing from lenders including a JP Morgan-led bank syndicate and certain existing lenders, said the Wayne, New Jersey-based company, which also operates the Babies ‘R’ Us chain.”
Chief Executive Dave Brandon hopes the Chapter 11 will free the company from the debts that “have held us back” in a “lasting and effective way.”
“Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long-term debt on our balance sheet,” he said in the filing.
Toys ‘R’ Us potentially closing up shop comes as no surprise in the age of Amazon, where e-commerce has quickly replaced the days of driving down to the local shopping mall to get desired appliances. A recent article in Slate profiled this so-called “retail apocalypse.”
Unfortunately, for the past decade, while it should have been aggressively reinventing itself, Toys R Us has been laboring under $5 billion in debt used to finance the acquisition. In 2016, a year in which Toys R Us sales fell 2.2 percent to $11.5 billion, the company spent $457 million on interest payments on its $4.6 billion in long-term debt. By comparison, the company’s operating income for the whole year was $460 million. Put another way, after paying interest, Toys R Us had only a few million dollars to invest.
The “Retail Apocalypse” is also bringing to light the phenomenon known as the “Shopping Mall Apocalypse,” where once bustling centers of commerce and retail have been reduced to ghost towns.